The Financial Case For a Transitional Care Unit

Matt McGillick, for HealthLeaders Media, July 7, 2008

A transitional care unit can be more lucrative than a hospital-based skilled nursing facility (HBSNF). Over the years, few things in the delivery of healthcare services have been so obfuscated by uncertain health policy, regulation, and reimbursement as have Medicare-certified hospital-based skilled nursing facilities. Hospitals that sought to operate units, mandated by Congress as an entitled benefit of the nation's elders, have been frustrated in their mission and denied the opportunity to serve the common health by:

    a) Schizophrenic shifts in reimbursement as Medicare experimented with alternative ways to price SNF services in a hospital setting (cost-based, routine cost limits, swing beds, impact of DRG incentives, new provider status; now resource utilization groups per diem rates).
    b) Contradictions between Medicare and Medicaid policies as 50 states dueled with Uncle Sam to shift hospital costs (the prudent buyer policy; incremental cost accounting; mandated Medicaid vs. Medicare census ratios; Medicare/Medicaid difference toward allocated hospital overhead).
    c) Fundamental policy shifts including deregulation of the hospital industry.
    d) The undue influence of nursing home lobbyists opposed to competition from hospital-based units were able to delay or stymie changes in state regulations which preclude development of HBSNFs.

These factors combined to create a very dynamic, unstable environment for those who would operate an HBSNF. They affected who could be served, at what price, the financial impact upon the hospital, and people's perception of HBSNFs. Depending upon who was asked, the HBSNF was seen as an essential element in the continuum of care; unfair competition for the nursing home industry; a way to maximize Medicare reimbursement; a way to fill empty beds; or a way to get paid for extended stay convalescing elder patients. At various times and places, it has probably been all of these.

The roller coaster ride became high speed from 1988 to 1998, as some states deregulated their hospital industries and financial incentives of the fixed rate DRG system to reduce length of hospital stays (to 4.0 to 4.4 days/stay), began to be felt by hospitals, encouraging many to consider HBSNFs. Nationwide during that time frame, the number of hospital-based units increased from about 800 to 2,165 and, not coincidentally, the length of the average Medicare stay dropped from 9.0 days/stay to 6.2 days/stay as hospitals could more easily transfer patients upstairs. Meanwhile, area nursing homes saw the new units as competition and developed more and better sub-acute units further expediting the discharge planning process.

But it is not history that is the focus here, except to establish the ambiguity that has plagued the development use of hospital-based units. A few years ago, we seemed to have reached a point where all the logic supported an expansion of hospital-based SNFs, but where we once had several hundred hospitals lining up to do so. Today, we now find few.

Passage of the Balanced Budget Act of 1997 and the shift from the more lucrative cost-based reimbursement (even with routine cost limits) to site-neutral RUGs III rates, seems to have reversed the growth cycle. However, while many hospitals saw the shift to the all-inclusive per diem as a disincentive to the operation of a HBSNF and closed their units, many still remain, begging the question: what is the financial impact of a hospital-based SNF in today's operating environment? Why did some hospitals close and others remain open, when the results of hospital-based units clearly indicates a declining average length of hospital stays?

MedPAC seems to have provided the insight to that answer. In its assessment of why hospitals closed HBSNFs, MedPAC staff identified three generic HBSNF programs in its Report to the Congress in June 2007.

    1) "The long term care models: predominantly long-stay population in which the first several days after a hospital stay are Medicare-eligible (care rendered in long-term care bed, not in a distinct unit, many such programs in New York and Minnesota and smaller hospitals nationwide).
    2) The (sub-acute) rehabilitation model: Traditional HBSNF patients who require . therapy, such as hips and knees. (some complex sub-acute, when therapy is a secondary need).
    3) The complex medical model: ... sometimes referred to as Transitional Care Units . a slightly lower nursing intensity than general m/s units . shortens the (hospital) inpatient stay . substituting SNF days for inpatient hospital days . Hospital benefits because they receive the same inpatient (DRG) payment . and they receive a separate SNF payment that they would not have received had the patient remained in the hospital bed."

Since each program focuses upon a different type of patient, the financial impact of reduced RUGs rates varied. None of the rates cover allocated overhead; thus, direct costs are primary determinant of profitability. The TCU program model has the highest nurse staffing and is able to accept transfers most expeditiously, lowering LOS, thus providing unique advantages.

In contrast, for years, the most popular HBSNF has been the Sub-acute Rehab Model (with a few complex m/s patients). This allowed hospitals to 'cherry pick' patients, although most could be served in a nursing home. While profitable under the old Medicare rates, under RUGs, these units can be less profitable, and do not yield the financial benefit of a TCU.

At issue is how much expense should be offset against the new revenue stream. Since a hospital can readily discharge, for example, the patient with a broken hip, to a nursing home, the decision transfer the patient to its own HBSNF is also a decision to incur the incremental cost (e.g., $345 for nurses, food, etc. and $80 for costs unique to a Medicare SNF NH Admin, PT, Med. Records, etc., or $425/day). (Note: All dollar amounts are intended to illustrate the point; each hospital is different).

The financial impact of the Sub-Rehab HBSNF is a simple calculation. Subtract the direct expense voluntarily incurred ($425/day) from the RUGs revenue (e.g., $450/day), which, in this example, yields a modest profit of $25/day. MedPAC staff learned that many hospitals (with a Traditional HBSNF), either lost money or concluded that there were more useful ways to use the space and closed the unit.

With a TCU patient, the financial impact is different. The hospital cannot discharge the patient and the expense is going to be incurred whether in an m/s bed or the TCU bed. This yields the basic rule of operating a TCU - serve only those patients (days) who, otherwise, would occupy an m/s bed.

Thus, when a patient (who cannot be sent to a nursing home) is transferred from an acute bed to a TCU bed, the attendant expense must be transferred with him or her. The financial impact of the TCU is the revenue received (e.g., $450/day), plus the savings due to reduced LOS (the $345 for nurses, food, ancillaries, etc.), minus expense unique to the unit ($80/day) and serve the patient ($345/day). The $345 savings offsets the TCU service cost, leaving a contribution of $370 ($450 minus $80).

Conversely, if a hospital were to discharge a patient to a local nursing home, under this model, the hospital would save $425. In fact, the TCU will generate both savings (due to expedited discharges) and increased revenue through its TCU.

The hospitals that closed HBSNFs had made the decision to diversify, incurring additional expense, for additional patient days. When the revenue dropped, so too did the profit. Conversely, a TCU serves only those patients who cannot (or will not) be sent to a nursing home. For the hospital, that often higher cost is offset by the RUGs revenue and the savings on the acute side.

Simply stated - because it is staffed and administered appropriately, the TCU enables the hospital to get paid for what it now gives away - (i.e., excess days which cause the hospital's Medicare length of stay to exceed the 4.4 days/stay, presumed by the DRG rates). Moreover, (as has been shown nationwide and in key states), the availability of the TCU to a hospital serves as a catalyst to nursing homes to set up more and better sub-acute units. So given all the changes in operating environment of an HBSNF, what a hospital CEO (with a sense of history) may believe the hospital-based TCU to be may not be the case. It can be a very profitable program, if it is used to serve only those patients who, otherwise, would occupy an m/s bed.

Matt McGillick is a hospital consultant who has worked with hospitals in several states. He may be reached at

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